The interconnected economies has produced spectacular world trade opportunities and higher economic growth in the past however, the increased competition between the different countries has also resulted in the disputes over trade barriers, currency speculation especially in case of China vs USA According to Pettis (2010), the professor of finance in Peking University’s Guanghua School of Management “things are going to get worse before we reach a point where leaders in the three or four major economies can come to an agreement over a long-term solution”.
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In other words, the globalization has produced great results but, is also producing the tensions of its own kind. This essay will briefly try to explain the globalization in the perspective of production and then, will go through the trends, opportunities and threats for the international business. It will also summarize the WEF’s Davos 2010 annual meeting and will elaborate its effect in the next section. Finally, the last section will look into the steps and recommendations can be considered by the companies and governments to cross over the tide of negative growth cycle and decreased international trade.
Puzzle of Globalisation: Perspective of Production
Globalization of trade and production is a gradual phenomenon which has been accelerated in the last few decades after the governments in different countries abolished various regulations in favor of more open trade policies. The research on hard disk drive industry by Gourevitch et. al. (2000:301) found that the ability of the US firms to change their production location rapidly across the globe has made them competitive. More importantly, in the process they have able to increase the employment of worker inside USA and other parts of world as well.
Recent Trends in Production:
Industries across the world can be broken down into two categories broadly: Manufacturing and Services. In fact, the globalization of production is a very interesting topic to analyze because it is happening beyond the limits of industrial commodities or the end products. While looking into the primary activities like Agriculture, international investors like George Soros’s Adecoagro are buying the farmlands to take advantage of abundant land available for sugarcane production. Similarly, many companies are following the suit to grab the land in Brazil and some other Latin American countries and shifting the production to new avenues (Kassai, 2010).
In Service industry one of the main destinations for outsourcing the IT work is India. The advancement in internet technology and World Wide Web services has provided a great opportunity to the industries across the world to coordinate the work simultaneously from different places. The advisory committee on IT from the Canadian Institute of Chartered Accountants (2003) suggested in their research paper that, the changing environment is very important to understand and outsourcing of IT services provide operational, technological and financial benefits. Likewise, in the manufacturing sector shifting of production from high wage developed economies like UK and USA to developing world happened gradually over time. Recently, China became the largest exporter in the world leaving behind Germany (The World Factbook, 2010). The shift in the manufacturing base to Chinese land was accelerated due to the opening up of economy to foreign investors and companies. The deliberate attempt of developing world governments has provided the incentives to the manufacturers from advanced economies to shift their bases to these countries while exploiting the low cost labor and easy access to raw material.
Moreover, the shift in production to other countries and reshipping back the manufactured products to the country of origin has also happened due to the emergence of FTAs. For example, after the creation of NAFTA in 1994 the US companies set their factories in Mexico near to the Mexican border and ship back the cheaply manufactured goods (Tutor 2u, 2010:7). In the same way, a new FTA launched at the beginning of 2010 by the China and ASEAN are targeting an interchange of raw material and manufactured products; taking the cost advantage of China in manufacturing without really shifting the production basis. Therefore, we can see the globalization of production is quite complex and influenced at various levels (Walker, 2010).
Opportunities and Threats to International Business & Tension between Stakeholders
According to BBC (2009), the wave of protectionism is coming from the developed nations this time. Similarly, the downturn has hampered the trade growth and according to estimates in International Trade Statistics Report (2009) by WTO the international trade was down by more than 10% in the last quarter of 2008.
The main concern arisen from the current scenario is the negative sentiment cycle accelerated by the economic downturn. Moreover, the trade imbalances between major economic players in world trade are also exacerbating the problems in trading conditions. Consequently, this has caused heightened level of global tensions.
One of the fallout of these circumstances is the tariff wars among the spectrum of economies. For example, EU extended the shoe tariffs on Chinese and Vietnam. This decision came after a number of trade dispute were going on between EU and China (BBC, 2009).
Nevertheless, the stake of all the countries in future growth is too great to ignore. One of the important finding by WTO is that, to bring the growth and dynamism within an economy is highly dependent on international business. In reality, to achieve a certain level of growth, much higher level of growth in export and import is needed. So, International trade provides an opportunity to step up the growth. Additionally, in a research on inflation and the globalization which effectively means increase in international trade mentioned that, irrespective of the direct evidences the globalization is somehow stabilized the GDP and hence the inflation (Ihrig et. al., 2007). Similarly, other significant benefits of increased trade are the push to innovation, higher flow of money, advantage of cost differential in production or services and benefit of cheap labor work force.
World Economic Forum – Annual Meeting at Davos (2010)
Unlike the previous years of high profile meetings and glamorized settings, this year was quite and much more down to business. Representation from some of the countries like US and Russia were almost zero whereas, other like India, China was having reasonable number of officials representing them (BBC, 2010).
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The most important topic on the agenda at the economic forum was about banks and reforms corresponding to them. Leaders like President Nicolas Sarkozy has directly criticized the bankers and argued for eliminating the economic imbalances like in trade (World Economic Forum Annula Meeting, 2010). Similarly, there was a consensus that the growth and economic power is shifting towards the emerging economies therefore, they will play increasingly important role in the sustainable recovery. Also, there were business meeting held by the prominent business people to increase business opportunities. For example, the boss of a Kenya based software firm ‘Joel Selanikio’ shared the panel with chief executive of google ‘Eric Schmidt’ (BBC, 2010).
Davos, International Trade and Globalization
As expected, the discussion at the Davos Annual meeting revolved around the coordination between the different stakeholders of the increasingly interconnected world economy. One of the important message come out from the meeting was that, the business leaders, governments, bankers, general society and all other should collaborate to strengthen the economic recovery. There was not a direct reference to the international business but, questions rose about the systemic risks of globalization, present business models, policies and regulations. These areas of discussion were not really ground breaking but, this event had bought the already emerging consensus further close to broad consensus.
The message emerged from the annual meeting can be seen in the executive summary of the annual meeting (2010). The heading of the annual meeting “Improve the State of the World: Rethink, Redesign, Rebuild” itself says that, the only way forward to fix the potholes is possible by coordinating the policies worldwide. Moreover, it emphasize on the new economic order through subtle change in regulations, policies and international coordination.
On the other hand, the particular reference to the controversial topic of exchange rate manipulation highlighted by the leaders speaks about the difference between the different countries. Importantly, all these things directly or indirectly affect the international trading opportunities in future. At present, the things are going to settle down In favor of greater coordination to increase the world trade and hence the growth but, only the future will tell how the consensus over the year will influence the real international trade.
Recommendations to Governments and Companies
Governments and companies have great stake in prioritizing and formulating the correct strategies to deal with the deep rooted systemic difficulties with the world economic system. There are many important points on which the governments need to focus more than ever. The recovery is fragile and so the international business development. The great recession of the century needs extraordinary policy initiatives for longer than usual. Governments must continue to support the economies to boost the output and in turn the confidence for trade. More importantly as said by the president Sarkozy the efforts of the international community should be well synchronized and well managed to prevent another crises. In the same way, the export oriented countries like Germany, China and South East Asian countries should rebalance their economies in favor of consumer led growth. This will not only reduce the global imbalance but, also lead to sustainable trade balances between the countries. In turn, the broader effect of this rebalancing will be on the leaders of the countries like USA, EU to not to resort to protectionist policies.
The global business went through the dip during the last recession. The financial system in the western countries is stabilized but, not strong enough to see the pre recession growth in near term. Therefore, it is highly recommended for the banking industry that they should not resort to the excessive risk taking behavior in search of higher returns. However, they should not restrained themselves in providing the credit to genuine borrowers as this will hamper the growth of the business within a country and in cross border scenario too. Similarly, the companies can optimize their profits by pursuing the path of innovation. History endorses this fact that, only constant innovation can leads to increased margin and sustainability of firms. Moreover, as the world going to be more and more connected they must take advantage of new technologies in bringing out the best results. Companies in advanced countries can increase their competitive advantage by investing in niche areas of products especially, which are hard to replicate like aerospace, green energy, electric cars etc. In the same way, the companies in the fast catching developing world can also take advantage of cheap labor, abundant high skilled work force and new opportunities opening up in the emerging markets.
Over the time, the manufacturing has shifted to developing low cost destinations like China and countries in East Asia. Similarly, the Information technology outsourcing happened to the countries like India, Philippines etc. However, the process of globalization is very complex and the recession has shifted some things away from this trend. Big economies over the world were tempted to implement protectionist measures but, the overall outcome of various international gathering like at Davos produced a positive consensus in favor of the increased coordination.
Finally, the current business climate is not very favorable for the international business but, as the recovery will become clearer and firmer the trade will also increase. The fundamental thing needed from the companies and governments is a close coordination between them and readjustment according to the new economic conditions. This will set a path for the sustainable and balanced growth and hence increased global trade and business.